Daily FX Wrap: Further CAD gains as BoC Gov Poloz hawkish leanings; GBP seeing some near term relief, but still well off recent pre-election highs. Ahead of FOMC, US inflation and retail sales on the schedule with UK jobs the focus in the morning.
We have seen a sizeable shift in the CAD over the last 24 hours, since the comment from the deputy governor of the BoC who stated that they need to assess the current policy stance in light of some of the upward pressures on economic growth ahead. GDP and employment data have been positive and as such, these latest assertions should not come as a surprise, though the timing (last night) has led to sweeping gains across the board, falling through 1.3400 and 1.3300 and now entering a key zone inside 1.3150-1.3250.
Against the JPY, we are now through 83.00, while against its commodity counterparts, parity has been breached yet again vs the AUD.
Governor Poloz has underlined his deputy’s view by stating these ‘extraordinary’ low rates have offset shocks, and this further suggests a leaning towards a rate move (up) closer in – from late 2018 pricing in earlier this year. We have however, come some way from the near 1.3800 highs seen just over 6 weeks ago, so much of this development has been anticipated by more forward-thinking participants in the market selling at these overextended levels, and we should see a further adjustment in the record short CAD positioning seen lately.
GBP trade has been dominated by the headlines surrounding the Tory discussions with the DUP, and we can anticipate some form of mini recovery in the pound should we get some accord, though there are all manner of compositions being considered given the impact on the internal dynamics between the UK and Northern Ireland. The pound has been on the front foot through the day, but so far, we can see little other than the tech based support at 1.2610-40 generating the latest move higher, with 1.2400-1.2900 now largely seen as no mans land which should see plenty of 2 way trade in the meantime.
EUR/GBP is another matter as the single unit is largely underpinned by the QE tapering expectations later this year. The cross rate is clearly finding it a little overstretched ahead of 0.8900 in the near term, but we expect support to come in ahead of 0.8700 lower down, so we have a little more lee-way, given the potential volatility which may emanate from EUR/USD over the FOMC meeting tomorrow night.
UK jobs data due out tomorrow morning, with wage growth a familiar concern for central banks across the globe. In the EU, employment data also on tap, but may be of limited relevance given structural diversity, with industrial production similarly ‘diluted’.
In the US, inflation and retail sales will provide some backdrop to the FOMC press conference later in the evening, so will draw keen attention. USD softness in light of the ‘dovish hike’ expectations may have run its course with USD/JPY finding support ahead of 109.00, while EUR/USD ahead of 1.1300 looks well contained, but we may see these levels tested if Fed chair Yellen reverts to an overly cautious tone. The permutations of what she may or may not say will percolate through Wednesday’s session.
Ahead of this, the overnight session has a number of data releases which could prove interesting, and first up is the NZ current account. Not too much of a risk factor to note here given the budget surpluses announced in June – a NZD0.92bln surplus seen in Q1.
NZD/USD is still probing higher levels in the meantime, and we may be nearing the inverse situation in the CAD where traders are perhaps pushing the extreme a little too far, especially with the NZIER revising growth forecasts for 2016/2017 lower.
AUD/USD continues to hold up well in light of the some of the bearish calls we have seen with regards to China concerns, commodities and exports thereon and some of the domestic considerations regarding household debt. We continue to see pre 0.7600 as a struggle, and if achieved, levels above here will likely be tough to hold onto. This should also keep the pressure on AUD/NZD, with another move towards 1.0400 seen today.
On China, fixed asset investment, industrial production and retail sales may also have an impact on AUD.
Japanese industrial production and capacity utilisation also due out.